How electric vehicles drive change in the auto industry

With battery electric vehicles (BEVs) rapidly approaching cost parity with internal combustion engines (ICEs), investors should be aware of the implications for the auto industry and its upstream partners — from raw materials mining and semiconductors to the utilities that support the charging infrastructure.

In the future landscape of mobility services and autonomous vehicles, the very idea of owning and driving cars will change.

As countries announce plans to ban sales of fossil fuel–powered ICEs to tackle air pollution, and battery costs fall faster than expected, Tesla’s progress in making BEVs popular and affordable is forcing auto industry leaders like Volkswagen, Toyota and Volvo to radically change their business plans.

In our view, the path for BEVs to take the lead over ICEs is open, but there are hurdles to further market penetration that must be cleared.

Consumers will adopt BEVs when the cars are well designed, with range at competitive cost and access to fast charging stations.

Range anxiety

More efficient battery technologies could mollify consumers’ understandable anxiety about buying electric vehicles with limited driving range. For a lithium-ion battery to be cost effective relative to an ICE, it would need a range of around 300 miles at a price of US$100 per kilowatt hour (kWh).

Based on the long and steady history of improvements in battery chemistry and gains in production efficiency, cost parity between BEVs and ICEs could be reached by 2022 or 2023.

Charging infrastructure and efficiency

To allow wider use of BEVs over ICEs, significant capital expenditure will be required to provide adequate access to fast charging stations. The infrastructure improvement process has made a promising start, as the Environmental Protection Agency’s diesel emissions settlement with Volkswagen has mandated that US$2 billion be spent on the construction of charging stations throughout the US. In addition, we have observed broad government commitments to expanding charging station networks globally in the coming years.

BEV charging stations must also shorten the time to repower. Even the industry-leading Superchargers exclusive to Tesla take at least 30 minutes to fully recharge their batteries. So a 1,000-mile trip would still take longer in a 300-mile range BEV than in a conventional ICE.

Industry realignment

Despite these obstacles, automakers have shifted gears to increase the variety of BEVs in development and on the market. Volvo has even announced that it will discontinue the production of pure ICE vehicles starting with its new models in 2019.

As we see it, investors should recognize that the surge in BEV adoption will have massive implications for many different industries. Miners of raw materials used in batteries — including lithium, nickel, copper and cobalt — should experience positive fallout, along with producers of the chemicals, semiconductors, anodes and cathodes needed to meet increased demand from battery manufacturers.

The benefits of rising BEV production may not be a boon to battery manufacturers themselves, however, as high government subsidies in Korea, Japan and China will likely keep competitors’ returns down despite the massive ramping up of both supply and demand.

Drilling and distribution of fossil fuels for ICEs will eventually be challenged by the transition from refueling to charging stations, although not for some time. Even with our ahead-of-consensus estimates for 8 percent to 12 percent BEV penetration by 2025, we expect that sales of cars with at least partially gas-powered engines will actually be higher in 2025 than today. What will likely change is that the gains in sales will be slower than their traditional pace in line with GDP and population growth.

Truly viable BEVs would clear a major roadblock to the development of autonomous vehicles by allowing them to be recharged cheaply and quickly while not in use. This in turn could accelerate the trend to replace car ownership with fleet vehicles for ride-sharing apps and other mobility services. While reliable self-driving technology may still take many years to perfect, we agree with the futurists that when it becomes widely available, it will pave the way for even more disruption in the auto industry.

In the meantime, we believe the better way to ride through these transformations is to go upstream in the value chain where there is already demand, rather than in the automobile industry itself. For example, we would look in the materials sector for companies that mine the lithium compounds used in batteries or in the technology sector for semiconductors and other devices. We expect to see little return among the automakers that have to invest so much capital to change their entire manufacturing processes, while automotive suppliers are at a point in the cycle where their valuations are stretched.

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